A longtime hardware partner of Roku, Inc. (Nasdaq: ROKU) is about to ship TV’s with Google TV, a competing operating system. This is how the end always begins.
On Tuesday, TCL executives announced updated versions of its most popular high-definition TV’s would feature Google TV. Officially, TCL is not abandoning Roku. Sets with older specifications are still available.
But the writing is on the wall: Investors should strongly consider liquidating Roku positions. This is going to get ugly.
Digital media and cord-cutting, the idea of giving up cable TV subscriptions, has completely disrupted the business of making television sets. Now, every TV must be internet-connected and have a functioning operating system with easy access to Netflix, Inc. (Nasdaq: NFLX), The Walt Disney Co. (NYSE: DIS)’s Disney+, Amazon Prime and YouTube. Hardware vendors are in the uncomfortable position of building user-friendly software interfaces.
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Roku used to win by default. Its familiar grid of icons was easy to use and wildly popular. Those days are over.
Executives noted during the second-quarter shareholder letter that viewers spent 1 billion fewer hours watching content on Roku devices. And the company swallowed the increased cost of components for its set-top boxes, walloping profit margins.
The TCL news is the final slap in the face for shareholders.
TCL managers told The Verge they expect TV OSes will finally shake out like smartphones. They see two choices: Google TV and Roku. The decision to begin a relationship with Alphabet Inc. (Nasdaq: GOOGL), the parent of Google TV, seems entirely reasonable … but with one large caveat: The new sets with Google TV have the best hardware specifications and greater software functionality at the same price points.
The TCL 6-series with Google TV will get a fast refresh rate 4K panel with two of the latest HDMI 2.1 ports, support for HDR 10+ and Dolby Atmos audio. It will also get microphones for voice commands from Google Assistant.
The software will feature:
• Content discovery across all of a user’s streaming subscriptions and live TV.
• A watchlist that can be fine-tuned from a computer or smartphone.
• All of the search functionalities for actors, directors and titles, which has made Google the most popular internet search portal.
The comparable Roku devices have an older 1440p panel, older HDMI ports and the familiar grid of application icons.
It’s not difficult to imagine which devices will sell best during October at Best Buy Co., Inc. (NYSE: BBY).
Big secular shifts like cord-cutting and connected TVs can lift the entire sector. Undoubtedly, Roku as a business has ridden these waves. But this is different. It’s about operating systems.
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Customers are about to get a choice between a state-of-the-art software system with all the bells and whistles of dynamic content curation and live TV integration versus … a grid of icons.
This is more reminiscent of iPhones vs. flip phones in 2009 than it is of today’s iOS vs. Android market battle. Roku has old software that simply can’t compete with Google TV. Worse, Google is not the only predator circling for the kill.
Amazon.com, Inc. (Nasdaq: AMZN) reported 50 million monthly active users last December for its Fire TV platform. Fire OS is built on the same codebase as Google TV. It’s also become a key pillar in the Amazon Prime network of services. And as with the online store, software recommendation engines play a big role in user experience.
Amazon.com’s IMDb TV, a free, ad-supported, on-demand, streaming video service, is a direct competitor with the Roku Channel. Deals with Warner Bros., Sony Pictures and MGM Studios in 2019 tripled the amount of available content. In May, the Seattle-based retailer announced MGM Studios was being acquired for $8.45 billion. The deal brings the James Bond film library inside Amazon Prime.
Roku is acquiring content, too. Executives announced a deal earlier this year to begin streaming 1,500 episodes of “This Old House,” the 1990s PBS home improvement show. Good luck with that.
The bottom line: Roku’s business is under attack from a variety of ambitious, well-funded technology giants that have better software, more money and a bigger vision for the future of streaming media.
The TCL news is only the beginning of this process. More bad news awaits Roku shareholders. Investors should strongly consider using strength to close positions.
Best wishes,
Jon D. Markman
